Room for more rate cut: RBI

Reserve Bank of India Governor D Subbarao today said that there is room to cut interest rates further.

“There certainly is room for cutting rates. The question is whether we should cut rates or not, when should we cut rates and by how much,” he told reporters in Tokyo.

The statement comes at a time when the market is expecting further action from the central bank, which has repeatedly cut the repo and the reverse repo rates and lowered the cash reserve ratio by 400 basis points to boost economic activity. Through its steps over Rs 3,88,000 crore has flown into the system but banks, especially foreign and private players, have not pared rates significantly.

Subbarao said RBI expects that commercial banks will take policy cues to reduce deposit and lending rates to keep credit flowing to productive sectors.

He also said that India is committed to open its capital account further but it will draw lessons from the current crisis on how to proceed. At a conference Subbarao said that India may see a further downturn in the investment demand before it recovers but its current account deficit may be smaller than expected.

Further, the RBI governor said that the combined fiscal deficit of states and central government may touch 10 per cent of the gross domestic product during the current fiscal. “So, it is a concern,” Subbarao said.

He warned that the growth moderation may be steeper and more extended than the previous projection. The government has projected 7.1 per cent growth this year 2008-09 and 7 per cent in 2009-10.

In recent months, industrial output has contracted, the services sector is slowing down, exports have been hit by the global downturn and investment demand is decelerating.

The fall in inflation should support consumption demand and reduce input costs. Furthermore, the decline in global crude prices will help reduce the subsidy bill and create fiscal space for infrastructure spending, the governor said.

Going forward, the monetary policy stance will continue to maintain comfortable rupee and foreign exchange liquidity positions, he said.

Referring to the availability of resources for various segments, he said there are indications that the pressure on mutual funds have eased and non-banking finance companies are also making adjustments to balance their assets and liabilities.